Options Show World-Beating Shekel to Give Back: Israel Markets

By Sharon Wrobel -
Feb 3, 2014

The shekel’s best days may be over as
the government and central bank step up efforts to weaken the
world’s best-performing major currency last year.

There’s a 59 percent probability the shekel will give back
half of the past year’s advance by the end of 2014, options data
compiled by Bloomberg show. The shekel recorded its biggest
monthly drop since August last month, with the Bank of Israel
and the Finance Ministry buying about $1.5 billion in foreign
currency, according to Rony Gitlin, head of spot trading at Bank
Leumi Le-Israel Ltd., the country’s second-largest bank.

“The central bank, with some help from the Finance
Ministry, is succeeding in halting shekel appreciation by more
aggressively intervening in the market,” Leumi’s Gitlin said in
a phone interview from Tel Aviv on Jan. 29. “Frequent
interventions signal the determination by the bank to act to
balance the exchange rate so it’s not hurting exports as much.”

Israel’s exporters expect to double job cuts this year as
the currency’s strength eats into profits. The efforts to weaken
the shekel coincide with a rout of emerging market currencies
after Chinese manufacturing growth slowed, and amid social
unrest in Ukraine and investor concerns about Turkish monetary
policy.

There’s a 59 percent chance the currency will weaken 3.75
percent to 3.6551 shekels per dollar by the end of this year,
implied volatility from options trading monitored by Bloomberg
showed. The shekel weakened 0.3 percent to 3.5275 a dollar at
4:16 p.m. in New York.

Containing Gains

The shekel appreciated 7.5 percent in 2013, the biggest
advance among 31 major currencies tracked by Bloomberg. Prime
Minister Benjamin Netanyahu said Jan. 24 that while the
government and the central bank were considering a “few
things” they can do to tame the shekel, exporters must adjust
to the stronger currency. The comments come as manufacturers
urged the Bank of Israel to cut borrowing costs and increase
foreign currency purchases.

Sales abroad of goods and services, which account for about
a third of Israel’s $273 billion economy, declined 0.1 percent
last year after rising 0.9 percent in 2012. The economy expanded
3.3 percent in 2013 compared with 3.4 percent the previous year.

Morgan Stanley said in a Jan. 24 note it has the most
confidence in the currency as a haven within emerging markets
because of Israel’s “resilient” economy and “strong”
external balance sheet.

Tumbling Currencies

A Bloomberg gauge tracking 20 emerging-market currencies
last week fell to the lowest level since April 2009. The central
banks of India, Turkey and South Africa have all raised interest
rates to defend their tumbling currencies.

Since the Bank of Israel’s last interest-rate cut in
September the shekel strengthened 0.5 percent against the
dollar. While that was the least among 31 major currencies
tracked by Bloomberg, some traders are betting rates may move
lower in coming months. One-year interest rate swaps, an
indicator for expected interest rates over the period, fell to a
one-month low of 0.875 percent on Jan. 24. The central bank kept
the benchmark rate at 1 percent for a fourth month last week.

“If the shekel appreciates in coming weeks, the Bank of
Israel may need to cut its rate in one of its forthcoming
decisions,” Ori Greenfeld, an economist at Tel Aviv-based
Psagot Investment House Ltd., said by phone on Jan. 29. “The
bank could also speed up foreign exchange purchases or introduce
taxation to trim shekel appreciation.”

Selling Shekels

Israel’s central bank said it will buy $3.5 billion in
foreign currency this year to offset the effect of new natural
gas revenue on the shekel, a 67 percent increase from 2013.

Since Bank of Israel Governor Karnit Flug earlier this
month said the central bank isn’t indifferent to developments in
the exchange rate, the bank has been more engaged in foreign
currency buying. Also, currency hedging by the Finance Ministry
totaled $340 million in the first two weeks of the year compared
with $100 million in November.

“The Bank of Israel will continue to use ad-hoc foreign
exchange interventions to limit appreciation pressures,”
Goldman Sachs Group Inc. strategists Kasper Lund-Jensen and
Ahmet Akarli said in a note Jan. 27.